News

The value gap - the missing beat at the heart of our industry

5th May 2016

By Frances Moore, CEO, IFPI

The speech below was delivered at the ‘state of the global music industry’ panel at Canadian Music Week, Toronto on 5th May 2016.

Good morning. It’s a great pleasure to be here in Toronto at Canadian Music Week. There are only a few music industry platforms today that reach a global audience. Canadian Music Week is undoubtedly one of them, and I congratulate the organisers who have developed this event into the influential forum it is today.

It’s also great to be in a country where the music industry is punching so much above its weight. Canada produced three of the world’s ten most successful artists in 2015: Justin Bieber, Drake and The Weeknd who all feature in IFPI’s top 10 global artist chart – an amazing achievement. Canadian artists are reaching a global audience and I’m delighted to be in Toronto – a city that has been showing the world what it means to be a real “Music City”.

Today’s global music business is at an extraordinary moment of change. Consumption of music is exploding across the world. You can see it everywhere you go, in every country: everyone is listening to music, in the street, on the train, in the car, at work, at home. Music streaming is surging internationally.

Music is embedded in people’s lives globally as never before. Music is one of the biggest drivers of the connected world. All of the top ten most watched YouTube videos are music videos; seven of the most followed people on Twitter are musicians.

Music is providing content of huge value to a vast array of businesses: technology companies; broadcast and media industries across the world; growing hospitality and tourism sectors; and much more.

Recorded music has gone truly global – thanks in particular to the impact of streaming services that have leapfrogged geographical borders and opened up new markets where music markets previously barely existed.

The opportunities for artists to get to a global audience have never been greater; and the choice for consumers accessing music has never been wider.

Last month IFPI published its annual Global Music Report. At first sight it presents the most positive picture of the state of our global industry in many years. For nearly two decades we were an industry used to reporting decline. But this year the story is different: we have reported growth of 3.2 per cent. Our industry’s first significant growth since 1998.

Two significant other metrics underlie this result. First, for the first time the rise of streaming has offset the decline of downloads and physical.

Second, revenues are up in all regions – Europe, North America, Asia and Latin America. And of the top 10 markets, seven are growing, including the top three; the US, Japan and the UK.

If this is the start of a long term recovery, then it has not happened by accident. Our industry has forged its own turnaround. Record companies have worked relentlessly to embrace change, licensing hundreds of services globally.

This has involved adapting, innovating and experimenting. Take China as an example. China has for decades been a market synonymous with piracy, barely registering as an opportunity for licensed music.

Today, China is the fastest-growing recorded music market in the world. Revenues rose 63 per cent in 2015. Record companies have licensed the large internet companies to open up access to the world’s largest fan base, nearly 700 million internet users.

At the same time, record labels have stayed true to their mission and their core business – that of investing in music, developing and nurturing artists. The internet has not put the record label out of business. On the contrary, it has made the record label more important as the primary investor in artists.

In 2015 the music business reached a key milestone globally. Digital revenues for the first time overtook physical formats to become the primary revenue stream for recorded music. Digital revenues now represent 45 per cent of industry revenues, compared to 39 per cent for physical.

Streaming is the biggest driver of this digital transformation. Revenues from music streaming are today four times bigger than they were five years ago. Streaming revenues are nearly matching downloads and next year will overtake them. Apple Music’s entry into the subscription market across 100 countries was a tremendous boost to the subscription sector.

And streaming is helping reboot new markets and investment in artists. Sweden and Norway are well known examples. But other markets are joining them. In the Netherlands, record labels are returning to invest in local repertoire for the first time in a decade. The Dutch market grew more than 10 per cent last year.

But our story is not just about streaming. It is about diversity. In two of the world’s top five markets, Japan and Germany, physical still accounts for more than two thirds of our business. Performance rights revenues have risen steadily for five years and are now double their level of ten years ago. And this is an area with tremendous further growth potential.

So is this finally the time for the global music industry to celebrate? The answer is: most definitely not. Let's put the so called “good news” in the proper context.

Here is our industry’s performance in 2015:

and here is that one year’s growth in proper context. An industry that has lost more than one third of its value over nearly two decades.

So our job is in fact only beginning.

At the heart of the state of the global music business today is an enormous anomaly. Music consumption is exploding worldwide. But the revenues resulting from that consumption are not being returned fairly to those who create, own and invest in the music. This is the problem known as the “value gap”. And here is an image that best illustrates the problem.

Advertising-supported user upload services are today by far the single biggest source of recorded music globally. Services like YouTube have some 900 million users. And yet they pay a tiny portion of the revenues earned by music rights holders – only four per cent of industry revenues globally in 2015.

The image is clear: it shows the dramatic contrast between the proportionate revenues generated by user upload services and by paid subscription tiers of services such as Spotify, Deezer and Rhapsody-Napster.

This, put simply, is the missing beat at the heart of our industry. It is the structural flaw in our marketplace. If it is fixed, I believe we will be looking at a future of sustainable growth for our sector for many years.

The value gap is not something our business can fix. It is for policy makers to legislate. It is a legislative issue caused by the misapplication of the so-called liability “safe harbours” to user upload services. This, quite simply, allows them to negotiate music licences in a way that is grossly unfair and devaluing of music. As a result they have an unfair advantage over other digital services, as well as depriving artists and labels of fair revenues.

Let me be clear. This is not a campaign to sweep away safe harbours altogether. They made sense two decades ago to protect passive, neutral intermediaries that do not select, organise, promote and monetise music. They make sense for the same purpose today. However, they do not make sense for services such as YouTube which are promoting and monetising music on a massive scale.

The value gap campaign is on the move. In the US, hundreds of artists have spoken out. In Europe a coalition of industry bodies including publishers, press and other media organisations, are calling for legislative change from the European Union to fix the value gap.

Artists have spoken out in a way that resonates across the industry. Debbie Harry. And earlier this week one of your own, Nelly Furtado. The call for change, against a status quo that isn’t working, is growing.

And policy makers are responding. In Europe there will be legislative proposals to address the value gap later this year. A study on the DMCA is under way in the US.
I’m fully aware that some see a value gap elsewhere. There are artists and managers and their representative bodies that call for greater transparency and a greater share of revenues from record companies. Those discussions are important, and record companies are listening and improving transparency.

But I believe it is more important to focus on that 36 per cent decline in value that our whole sector has suffered. That is where artists and labels have lost most. It is that value that most needs to be reclaimed.

In conclusion - we are at an extraordinary moment in our global business. Music is being consumed at unprecedented levels. Measurable growth is being achieved for the first time in nearly two decades. And yet the job of turning around the global music industry is really only just beginning and the scale of anomaly to be fixed is huge.
Music is driving economic activity and digital commerce. Yet, in terms of the value being returned to its creators and investors, music is massively undervalued.

One real cause for optimism in 2016 is that this is now beginning to be understood and articulated across our sector. And more importantly, by the policy makers to whom we look to deliver change.